A Win-Win for Isis, Genzyme in Cholesterol Drug Deal

Isis Pharmaceuticals (ISIS) came out as the big winner from the JPMorgan Healthcare Conference as the biotech announced a licensing deal with Genzyme (GENZ) for its cholesterol drug mipomersen. The deal marked the end of an auction for the drug in which up to 10 companies were interested.

Genzyme will pay $325 million up front to Isis, with a $150 million investment and $175 million upfront licensing payment. Genzyme's investment in Isis is for five million shares of the company at $30/share, which is approximately 5.75% of Isis. Genzyme will also pay up to $1.58 billion more and the companies will split the profits if the drug reaches certain milestones.

At first look, I thought that Genzyme was paying way too much for this drug. However, after plugging some numbers into my rNPV template, I feel that both companies could greatly benefit from this deal and that Genzyme might have gotten the drug at a great price.

I looked at potential peak sales for mipomersen from $750 million annually, which is estimated by one Bear Stearns analyst according to the Wall Street Journal to $3 billion annually, which would trigger further payments by Genzyme. I believe that mipomersen will be worth from $650 million to $2.5 billion for Genzyme and from $485 million to $2.5 billion for Isis based on peak sales. If peak sales do reach $2-3 billion, I think this deal favors Isis tremendously, especially since royalty rates would jump to 50% of profits and further payments will be made by Genzyme. However, analyst estimates peg the drug more toward $1 billion in peak sales, which would favor Genzyme in the deal.

Isis projects to file an NDA late 2008 or early 2009 for mipomersen in the treatment of a rare disease called hypercholesterolemia. However, the drug would not be ready for an NDA for routine high cholesterol until at least 2010.

GENZ vs. ISIS 1-yr chart:

Disclosure: I have no positions in the stocks mentioned.